Why did the legislature reject federal unemployment payments?
This is a common misconception. The legislature did not reject these unemployment payments — the federal government refused to grant them to the citizens of North Carolina. State governments do not have the power or the authority to either pay federal benefits or take away federal benefits.
In response to the majority’s decision to scale back overly generous state benefits in order to accelerate the repayment of our state’s existing $2.8 billion unemployment debt to the federal government, the federal government refused to grant North Carolina a waiver from federal requirements. Had it treated North Carolina the same way it did four other states (who, perhaps coincidentally, voted for President Obama in 2008 and 2012) the administration would have allowed us to be grandfathered in to the federal benefits program. The Obama administration regularly threatens states with taking away federal dollars when they fail to do as they are told to implement government expansion provisions.
Speaker of the House Thom Tillis and Senate President Pro-Tem Phil Berger both implored the federal government to extend federal emergency unemployment benefits to North Carolinians until the end of this year, and to grandfather us into the program as it did for those four other states. The Obama administration denied their request.
I heard that 170,000 people lost their unemployment benefits.
That’s a number that has no basis in fact and is nothing more than hysterical political spin. According to Assistant Secretary of Employment Security Dale Folwell, a total of only 68,259 people were eligible for federal emergency unemployment benefits in North Carolina — far too many, of course, but a far cry from the inflated number claimed by liberal advocacy groups.
But why did the legislature slash current state benefits for the unemployed?
They didn’t. Unemployment benefits for those who received them before July 1, 2013 remain unchanged. What the legislature did was scale back the maximum weekly unemployment benefit from $525 (the fifth highest in the nation and the highest of our neighboring states) to $350 a week to be more in line with other states in the region (Alabama pays out at $265, Florida at $275, Georgia at $330, Kentucky at $415, South Carolina at $326, and Tennessee at $275). And reducing this maximum benefit level will affect only higher-income earners.
Bringing North Carolina’s unemployment benefits more in line with our neighboring states will save us an additional $250 million — and allow us to pay back our debt to the federal government by the third quarter of 2015 (according to the latest projections). Even the North Carolina Justice Center, a liberal advocacy group, agrees with the need for reform: “Fiscal health will require that North Carolina pay down the existing loan balance and put in place a forward-financing system that can best support the system in good times or bad.” (From Getting Solvent: Rebuilding the Unemployment Insurance Trust Fund to Protect North Carolina’s Economy, Budget and Tax Center Reports, May 2012.)
Doesn’t the new law cut back how long I get a government check?
Yes. The duration of state unemployment benefits under the new law is scaled back from 26 to a minimum of 20 weeks (with that number being tied to the current unemployment rate and adjusted twice a year, so it may end up being more). It’s estimated that this adjustment will save between $230 million and $440 million annually — and close the current shortfall immediately.
What’s the difference between state unemployment benefits and federal unemployment benefits?
The federal unemployment program cuts a check to an unemployed person when their state benefits run out. Traditionally, these federal supplemental checks were cut for an additional 3 to 6 months, but Congress extended federal unemployment benefits out to a period of nearly two years (99 weeks) for everyone who applies. This ballooning federal program has cost taxpayers more than $600 billion since 2008: according to a June 2013 Congressional Report, spending on federal extended benefits leapt from $20 million in 2005-07 to $138.6 billion in 2008-10, an astonishing 692,900 percent increase.
Who pays into the state’s unemployment program?
Perhaps the most common misconception about unemployment insurance is that workers pay into the system through a deduction from their payroll checks, which is not the case. In North Carolina, unemployment insurance benefits are completely funded by taxing businesses — not with employee contributions as most people think.
From the Division of Employment Security FAQ Sheet: “The unemployment insurance tax is a tax on employer payrolls paid by employers from which unemployment benefits are paid to qualified unemployed workers. Unemployment tax is not deducted from employee wages. Unemployment tax payments made by employers are transferred to the Unemployment Insurance Trust Fund in Washington, D.C.”
But doesn’t paying extended benefits to unemployed people help stimulate the economy?
More and more evidence is surfacing showing that extending unemployment benefits (beyond temporary assistance) actually contributes to a higher rate of unemployment. Studies show that those receiving extended unemployment checks actually spend less time looking for work than the unemployed who have no benefits. Those without benefits, or whose benefits are about to expire, have a greater incentive to seek work and spend more time looking for employment.
Employers have long understood that the more time people spend not working, the more unemployable they become. Policymakers have a responsibility to help the people of North Carolina best prepare for our modern, fast-moving job market.
Why does North Carolina owe $2.8 billion to the federal government?
In the 1990s, when the economy was better, North Carolina’s Unemployment Trust Fund was badly mismanaged — at a time when the state should have been building up the trust fund. Legislators lowered employer contributions to the fund in the mid-1990s and turned the system essentially into a “pay-as-you-go” financing structure. This unsustainable policy drove the solvency position of the trust fund to unsafe levels just prior to the recession of the early 2000s.
Over many years of financial negligence, the fund became depleted — and then, in 2009, lost nearly $2 billion. Since no steps had been taken to prevent this looming catastrophe, the state had to turn to the federal government to borrow the $2.8 billion that it was obligated to pay out as unemployment benefits. Had North Carolina sustained the trust fund in line with the national average from 1990 to 2004, it would have maintained a level of $2.4 billion by that time and today there would be no solvency issues for the current legislature to address. Instead, in 2004, the fund had a balance of $23 million with an “average high cost multiple” of 0.38, well below the recommended level of 1.0.
Doesn’t every state borrow money for unemployment benefits?
No. There are 26 other states that have been borrowing money from the federal government under Title XII—Advances to State Unemployment Funds. But the amount that North Carolina taxpayers owe to the federal government is the third highest in the nation, just behind California and New York (both of which have far higher populations). North Carolina taxpayers have made over $200 million in interest payments alone on that debt; money that could otherwise have gone to give our teachers a substantial pay increase or improve our state’s infrastructure.
Why would we pay off this $2.8 billion debt early?
Aside from bringing financial solvency to North Carolina’s broken unemployment insurance system, paying down this massive debt to the federal government by 2015 will save taxpayers and businesses over $400 million in interest payments and allow us to begin building a $1 billion reserve fund for future unemployed workers. The new law restricts the use of this reserve fund to the direct payment of unemployment benefits, unlike in the past.
So long as the UI debt goes unpaid, not only will interest continue to accrue, but employers will have to include higher UI taxes to their cost of doing business. The federal government is already imposing a 0.3 percent addition to the prevailing 0.6 percent federal UI tax (for administration costs). And that tax will continue to rise in additional 0.3 percent increments annually until repayments begin.
But what does all this have to do with creating jobs?
Great question. New companies and small business growth account for 99% of job creation, so it’s imperative that we provide more fertile ground for them to start-up, relocate, and expand. Businesses are far less likely to thrive in North Carolina when they are shackled with increasingly higher taxes to pay off our massive unemployment debt (remember — unemployment insurance benefits are paid for exclusively by taxing businesses). Put simply, our unemployment debt is adding too much to the cost of doing business in North Carolina: forcing new companies to look elsewhere and resulting in cost-cutting measures like salary cuts, benefit reductions, downsizing, hiring freezes and layoffs for those companies already here.
As President Clinton once famously said, “The first thing you ought to do when you find yourself in a hole is to quit digging.” And retiring our debt to the federal government by the end of 2015 (coupled with the significant tax reform and regulatory reform measures also passed this year) will free-up businesses again to grow and add jobs.
OK. What else does the law do?
Also included in the law is a new provision that closes a loophole for governments and nonprofits, now requiring them to pay into the state’s unemployment fund — something they were exempted from doing by past legislatures. “Unfortunately, when the state has layoffs, we’ve been riding on the backs of the private sector,” said Representative Julia Howard, the bill’s primary sponsor. “The business community and our citizens understand the need to fix this problem so we can be in a better position to create jobs and move people off of unemployment and into the workplace.”
Wow, this all sure is interesting. Where can I learn more?
On May 14, 2012, the W.E. Upjohn Institute for Employment Research prepared a comprehensive report analyzing the options for tax and financial management strategies to achieve and maintain solvency of the North Carolina Unemployment Insurance Trust Fund Account called “North Carolina’s Unemployment Insurance System: A Simulation and Policy Analysis.” You can download that exciting report here.